Let’s Tell Multinational Corporations To Just Pay Their Taxes

At yesterday’s Senate hearing the CEO of Apple said they follow the law when they “defer” billions and billions of dollars in taxes they owe by keeping profits “out of the country.” He’s talking about the “Subpart F” corporate tax loophole that practically forces companies to move jobs and factories and profit centers out of the country. (“Double Irish” to those in the know. “Double Irish With A Dutch Sandwich” to those who know too much.) So let’s change that law and make these companies pay the taxes they already owe.

Apple “follows the law.” Other giant companies also “follow the law” when they pay little or no taxes. The thing is, they also do what they need to do to keep the laws from being changed to benefit We the People instead of a few ultra-wealthy plutocrats.

Apple has transferred what Senator Levin called its “crown jewels” and its “golden goose” to a non-US subsidiary company. Apple transferred its “intellectual property” to an Irish “company” that Apple owns and runs. The company doesn’t really do anything except it “owns” the patents, etc. Irish law says a company that isn’t actually doing anything in Ireland doesn’t have to pay taxes, and US law says that Apple doesn’t have to pay taxes on profits of a foreign subsidiary company until the company passes its profits to the parent US company. As a result Apple is keeping more than $100 billion in the accounts of that Irish company. (The accounts happen to be in the US.)

Google also follows the law. Its Bermuda-based subsidiary made more than $10 billion in 2011, about 80% of its pre-tax profit that year.

Microsoft Corp does 85 percent of its research and development in the United States. Of its 94,000 employees, 36,000 are in product R&D. The company had reported income of $23.2 billion, but with a federal tax liability of $3.11 billion only paid an effective federal tax rate of 13.4 percent. That’s much lower than the top statutory rate of 35 percent for corporations.

The way the group accomplished this is through a wide variety of foreign groups in tax havens like Ireland, Puerto Rico and Singapore, and by exploiting a recently updated tax loophole.

In fairness to Microsoft, they’re doing what nearly every other major technology company does.

Apple keeps more than $100 billion out of the country to avoid taxes. All together the giant US multinationals are keeping somewhere between $1.7-$2 trillion “out of the country” and this amount is growing by hundreds of billions. If they ever do “bring the money home” by transferring the money to the US-based parent corporation they have to pay taxes on it, minus any taxes already paid to other countries. We the People should just get rid of the “till they bring the money home” loophole.

How They Do It

Here is how it works: You develop intellectual property (IP) in the US — software, patents, etc. — using US-educated employees who drive on US-built roads, based on US-funded scientific research, and you use the US legal system and the US financial system to become big and powerful. Then you “transfer” that IP to a foreign subsidiary that is a company in a post-office box somewhere that doesn’t make you pay taxes… You completely control that company but it is a “foreign” company. You pay a “license” fee to that company for everything you sell, so that company winds up with all the profits.

From then on, the profits made accumulate with the “foreign” company that “owns” the IP even though it is entirely controlled by the US company, set up as a “foreign” entity solely to keep the profits from being made by the US company.

This sort of scheme also pushes jobs and manufacturing out of the country. If you manufacture out of the country and buy the product from a foreign subsidiary the same deferral applies. So companies are “encouraged” — some would say forced — to follow these schemes. If one company is boosting its numbers with these schemes, this pretty much forces other companies to follow or fall behind, and maybe eventually fall dead.

Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland — where Apple had negotiated a special corporate tax rate of 2 percent or less in recent years — but keeps its bank accounts and records in the United States and holds board meetings in California.

So the money is in US bank accounts (and investments), the corporate records are here, the board meetings are here, but it is an Irish corporation. Right.

During the last several years, major companies like Microsoft, Hewlett-Packard, Google and Abbott Labs have lowered their tax bills by arranging for their billions in profits to flow to subsidiaries that are technically offshore — even though some of the money is placed in United States Treasury bonds and other government securities.

When some companies can gain advantages from schemes like this other companies have to do the same or face extinction. It doesn’t matter if they hurt the country — the executives in these companies really have little choice but to “follow the law” if they want to stay in business. It is up to We the People to make the congress change these laws.

They Follow The Law But They Write The Law

It’s one thing when companies just “follow the law.” It is another thing entirely when they pay lobbyists and put big money into secret campaign funds and the rest of what they do to write these laws and keep these laws the way they are, hurting the country and us. And now these companies are actually arguing for a special tax break on this money they are holding “outside the country,” called a “tax repatriation holiday.” They want a break letting them pay much lower taxes than they already owe to reward then for keeping the money out of the country away from their own sharehodlers! On top of that they want something called a “Territorial Tax” that lets them do this from now on with no taxes at all!

I mean, you can’t blame them for trying, but, seriously?

What does it mean to be an American corporation? These giant American companies got where they are because they had the advantages of American-educated employees who got to work on American taxpayer-built roads, using American-funded basic R&D and American-funded courts and an American-backed financial system (remember the bailouts) backed up by a very expensive American military, etc. on their way up.

Wealthy corporate executives argue that these giant companies have no obligation except to make profits. But ask yourself this: “In a democracy why would We the People pass laws that set up entities that don’t benefit US?” It is time for We the People to remember that we are the boss of them, not the other way around, and make them pay their taxes.

About Dave Johnson

Dave has more than 20 years of technology industry experience. His earlier career included technical positions, including video game design at Atari and Imagic. He was a pioneer in design and development of productivity and educational applications of personal computers. More recently he helped co-found a company developing desktop systems to validate carbon trading in the US.